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May 5, 2014

Top Reasons Indian Election Is Important to Global Investors

International investors have been watching India closely as the country casts votes in what has been called the world’s largest exercise in democracy.

During the drawn out process, which ends May 12, more than 800 million will cast votes in the longest general election in the country’s 67-year history.

The outcome has implications for the future of the nation that, despite the macroeconomic setbacks it has suffered over the past couple of years, is one investors believe holds tremendous potential.

Here are three reasons the Indian election is important to investors:

1. Waiting for Reforms

There’s a great deal of interest in the elections because if you look at India over the past two-and-half to three years, the major reforms that investors had been expecting have not come through, and as a result, the economy has drifted lower, said Deepak Lalwani, OBE, director of Lalcap, a London-based consultancy specializing in India investments.

“There’s a sort of policy paralysis in India that only a strong leader with the backing of a stable coalition government can help lift,” Lalwani said. “India had experienced significant growth but that trajectory came to a standstill, as it were, since the necessary reforms haven’t gone through. Clearances for major infrastructure projects, for example, didn’t pass, and also, the government’s inability to control inflation has kept interest rates high and diminished business confidence, thereby reducing capital expenditure and slowing the economy overall.”

Many large and important projects are awaiting approvals from government departments, but things are not moving, agreed Nupur Pavan Bang, head of analytics at the Insurance Information Bureau of India.

The government machinery needs to start working, but more importantly, “something needs to be done to bring in accountability for people responsible for implementing the government schemes. A large country like India needs certain schemes to uplift certain strata of the society. However, there are serious questions regarding the schemes reaching such people and their efficacy, although they will probably help bring down India’s fiscal deficit,” Pavan Bang said.

2. Potential for Expansion

For many years, India rose and shone in the global economy, but according to Sunil Asnani, lead manager of the Matthews India Fund, the macroeconomic challenges it has faced in recent years have been mostly self-inflicted, and can be fixed, given the political will.

Despite these challenges (including a weaker Indian rupee) however, export-oriented companies have benefited and companies in sectors such as consumer staples have managed to do just fine, thereby giving Matthews good investment opportunities.

“Once reforms are initiated, the potential for more [investment] opportunities will expand,” Asnani said.

India is unique because of its demography, culture, education and large working population, said Pavan Bang. “If the government machinery breaks down, foreign investment may dwindle in India, but Indians will still prosper within India,” she said. “The exports may come down, but there is a huge domestic market and enough work for all those who want to work.”

3. Frontrunner Has Good Track Record

Formal polls and word on the street thus far indicate that Narendra Modi, who heads the opposition Bharatiya Janata Party, is the frontrunner to become India’s prime minister. Modi has served as chief minister of the state of Gujarat (where Mahatma Gandhi was born) since 2001, and arguably under his leadership that state prospered and managed to maintain economic strength despite the troubles the rest of India has been facing.

In light of a likely victory for Modi, the benchmark India indices have gone up significantly in the past month. Modi is seen as being pro-business and investors are hoping for a stable and decisive government under his leaderships

“Modi’s remarks thus far – he’s said that foreign investors are welcome to India if they create jobs, bring in assets and niche technology – have been viewed as very positive, and he has a track record for being a great administrator and executor,” Lalwani said. “However, execution is not easy in India and even for someone who has the ability to implement decisions, actually bringing the necessary reforms to fruition could prove a challenge without the right support.

All the same, Lalwani said it’s important to highlight the fact that in the 67 years since India’s independence, the transfer of power between successive governments has always been smooth. India has never defaulted on its international obligations and for whatever pressure there has been on the Indian rupee and on the economy, the Reserve Bank of India has not imposed capital controls – something that happens in other emerging market countries.

“These are very important factors that investors should bear in mind, as they remind themselves that no new government will be able to effect change overnight,” Lalwani said.